The Petroleum Agreement with ExxonMobil:what we need to know

Last week, we highlighted the key provisions of the Petroleum Commission Bill 2017 which has been referred to a Select Committee of the National Assembly for detailed scrutiny. The Bill contains certain requirements that reflect not only a ministerial over-involvement but also overlapping responsibilities with those of the Guyana Revenue Authority (GRA) relating to the collection of State revenues from petroleum operators. Some of the sections also conflict each other.

The Minister acknowledged the apparent over-concentration of powers in his hands and has indicated that the Bill would be reworked and submitted to the Cabinet for consideration. He indicated that some of fiscal responsibilities of the proposed Commission would be retained. However, Article 216 of the Constitution only permits the retention of State revenues by a fund established by an Act of Parliament for “the purpose of defraying the expenses of that authority”.

Today, we examine the key provisions of the Petroleum Agreement between ExxonMobil’s subsidiaries Esso, Nexen and Hess, and the Government of Guyana dated 27 June 2016. Since the Agreement was signed, there had been calls from key stakeholders for the Agreement to be made public. The authorities declined to do so, citing issues of national security and territorial integrity as well as confidentiality. However, the International Monetary Fund report entitled “Guyana: A reform Agenda for Petroleum Taxation and Revenue Management” recommended that the Agreement be made public. That report was issued in November 2017, and the IMF team that compiled the report briefed the Cabinet on its contents. In late December 2017, the authorities released the report to the public.

Prior to its release, this Column had commented on the Agreement based on media reports of its contents as well as statements from government officials. With the benefit of sight of the Agreement, we are now in a better position to offer more informed comments on the key provisions of the Agreement, especially as regards royalty payments, signature bonus and profit sharing arrangements.

Petroleum exploration and production licences

According to the Petroleum (Production) Act 1986, petroleum in its natural condition in strata in Guyana is the property of the State. The Guyana Geology and Mines Commission (GGMC) is responsible for planning and securing the development, exploitation and management of petroleum and to ensure that the citizens of Guyana derive the maximum benefit from such resource.

There are two types of petroleum licences: a prospecting licence and a production licence. ExxonMobil was granted a petroleum prospecting licence for four years during which period one exploration well is to be drilled. The licence can be renewed twice for three consecutive years at the election of Exxon during which period one additional well each is to be drilled. On the first renewal, Exxon shall relinquish 20 percent of the contract area, excluding discovery or production areas, or any block or area that the Minister determines shall not be relinquished. Blocks to be retained during the first and second renewals shall not exceed two discrete areas unless the Minister decides otherwise. At the end of the second renewal, Exxon shall relinquish the entire contract area. However, the Minister may extend the exploration period if Exxon provides good cause.

Where a discovery of a potentially commercial interest is made, Exxon must inform the Minister, submit an appraisal programme and apply for a petroleum production licence. Within six months of the grant of a production licence, Exxon must prepare and implement a programme of training of Guyanese nationals in petroleum operations. A production licence can be renewed for a maximum of ten years.

Exxon may freely export for processing and laboratory examination or analysis, samples constituting petroleum data. However, the equivalent samples must first be delivered to the Minister and becomes the sole property of the Minister upon relinquishment, expiry, surrender or termination of the licence. The Minister is also free to carry out inspection of Exxon’s operations by giving seven days’ notice.

The issue of confidentiality

All petroleum data, information and reports obtained or prepared by Exxon relating to the contract area, are to be treated as confidential and shall not be published or reproduced otherwise to any other person without the written consent of the other party to the Agreement. In addition, Exxon shall treat as confidential petroleum data that becomes the sole property of the Minister for a period of one year. As can be noted, the Agreement per se is not confidential.

Annual licence rental charge

Upon the grant of a petroleum exploration or a petroleum production licence, Exxon shall pay an annual rental charge of one million United States dollars for the contract area for the entire exploration or production period. Payment is to be made directly into bank accounts held and controlled by the Government.

Cost recovery and profit sharing

Exxon shall bear and pay all contract costs incurred in carrying out petroleum operations and shall recover such costs as recoverable contract costs only from cost oil and/or cost gas. Contract costs are all those costs relating to exploration, development, operations, service, general and administration as well as annual overhead charge, but excludes pre-contract costs. Recoverable contract costs are to be applied to the value of crude oil (cost oil) produced and sold from the contract area in any one month and are limited to 75 percent of production for that month. Unrecovered costs are to be carried forward to the following month. The remaining 25 percent of production and sale for each field (profit oil) is to be shared evenly (i.e. 50/50) and on a monthly basis between Exxon and the Government of Guyana.

Exxon may allocate the quantity of cost oil towards recoverable contract costs from any field or fields. It shall also have the right to use as much of the production as may be reasonably required, and the quantities so used or lost shall be excluded from the calculation of cost oil and profit oil.

Prior to the release of the Agreement, Government officials had stated that 75 percent of the revenue earned by Exxon will be used to recover its investment, estimated at US$5 billion by the year 2020 when production is set to begin. As a result, our previous articles on the subject were based on this statement which, as can be noted, is not the same as stated in the Agreement. However, our concerns relating to the quantum of royalty and the profit-sharing arrangements as opposed to a revenue-sharing one remain valid.

Taxation and royalty

Exxon and its affiliated companies are exempt from any tax, value-added tax, excise tax, duty, fee, charge or other impost in respect of income from petroleum operations or from property held, except for: (i) import duties; (ii) taxes, duties, fee, etc. for specific services performed for public or commercial enterprises that is unrelated to income derived from petroleum operations; (iii) rents due to Government for any land rights granted; (iv) annual licence charges; (v) local government taxes (not calculated by reference to income); and (vi) stamp duties, registration and licence fees or other taxes on a minor nature. The Property Tax Act is also not applicable to Exxon.

Notwithstanding the exemption from the various taxes referred to above, income and corporation tax on Exxon’s taxable income shall be paid by the Minister on behalf of Exxon out of the Government’s share of profit oil. Exxon shall pay the Government a royalty of two percent on all petroleum produced and sold, less quantities used for fuel and transportation in petroleum operations. However, the Minister may remit in whole or in part, or defer payment.

Where exploration activity is in progress within the contract area, the provisions of Section 10(b) of Corporation Tax Act and any successor provision relating to corporation tax rates for commercial companies shall not apply to Exxon in respect of payments made to its affiliated companies and sub-contractors. Affiliated companies and non-resident contractors shall also not be subject to the provisions of the Income Tax Act and the Corporation Tax Act during the exploration period on income earned for any tax year if they have conducted business in Guyana for 183 days or less.

Exxon, its affiliated companies and sub-contractors are exempt from any tax, duty, fee, withholding charge or other impost applicable to interest payments, dividends, deemed dividends, transfer of profits or deemed remittance of profits. Expatriate employees of Exxon, its affiliated companies or non-resident sub-contractors shall not be subject to the provisions of the Income Tax Act and shall not be liable for personal income tax if they are not physically present in Guyana for 183 days or less.